The Canadian economy contracted 1.6% in the second quarter of 2025, more than analysts had expected. The main factor was that exports fell 7.5%, which was also the biggest drop in five years due to US tariffs, while business investment in machinery and equipment also declined. Statistics Canada said this was the first quarterly contraction after seven consecutive quarters of growth.
However, the slowdown in exports was partly offset by strong domestic demand. Household spending jumped 4.5%, residential investment rose 6.3%, and government spending rose 5.1%. Overall, domestic demand grew 3.5%, showing that the domestic part of the economy remains resilient despite weak exports.
The data reinforced speculation that the Bank of Canada will cut interest rates at its September meeting, after keeping rates at 2.75% for the past three meetings. Money markets raised expectations for a rate cut to 48% from 40% previously. Two-year government bond yields also fell, while the Canadian dollar weakened slightly against the US dollar.
While monthly GDP fell 0.1% in June, the preliminary estimate for July showed growth of 0.1%. This gives hope that the third quarter may be better than the second, with continued support from strong domestic spending.
